World Geopolitics and Markets Update: 18/10/2017

MADRID (Reuters) – Spain’s central government threatened on Thursday to suspend Catalonia’s autonomy after the region’s leader said it could go ahead with a formal declaration of independence if Madrid continued its “repression”

Catalan President Carles Puigdemont arrives to attend the Catalan European Democratic Party (PDeCAT) extraordinary national council meeting in Barcelona, Spain October 18, 2017. REUTERS/Gonzalo Fuentes

In an unprecedented move since Spain returned to democracy in the late 1970s, Prime Minister Mariano Rajoy said he would hold a special cabinet meeting on Saturday to impose direct rule in Catalonia.

Catalan president Carles Puigdemont, ignoring a 10 a.m. deadline to drop his secession campaign, threatened Rajoy with a formal declaration of independence in the Catalan parliament.

The two statements increased uncertainty over a one-month political crisis that has raised fears of social unrest, led the euro zone’s fourth-largest economy to cut its growth forecasts and rattled the euro.

Spanish government bond yields rose and stocks sold off after the deadline passed, while the euro dipped into negative territory.

WORLD MARKETS

LONDON (Reuters) – World stocks set a fresh record high before stalling in Europe on Thursday, as the longest winning streak for Japanese stocks since 1998 and the first close above 23,000 for Wall Street’s Dow index helped to offset nerves in Spain.

Traders were marking 30 years to the day since the 1987 Black Monday stock market crash but there couldn’t have been a greater contrast as equity markets have continued to clock up milestone after milestone.

The Nikkei enjoyed its 13th straight daily rise, helping the MSCI index of global stock markets .MIWD00000PUS – now up 17.6 percent for the year – add to its long list of record highs.

It wasn’t all one-way traffic, though.

European shares took their biggest tumble in almost two months after a new batch of third-quarter results brought some disappointments, notably from Anglo-Dutch consumer goods titan Unilever, French advertising group Publicis and Germany’s Kion.

They then took another lurch lower as signals emerged from Spain that Madrid was gearing up to invoke a never-before-used clause to re-impose central rule over the restive region of Catalonia.

The euro EUR=EBS trimmed gains that had taken it to a three-day high against the dollar, while Spanish bond ES10YT=TWEB markets gave up their early morning gains.

“Everyone is watching this with great interest but it just looks like a standoff,” said Saxo Bank FX strategist John Hardy, saying the situation was something of a ‘catch-22’ for Catalonia.

A declaration of independence would see it lose its prized autonomy ,while calling a regional election could mobilize Catalan voters who would prefer to stay part of Spain.

“But the market is not expressing any real fear over this and I think that is justified,” Hardy added.

The other big currency market move came from the New Zealand dollar. It was sent skidding to its lowest since May after the left-leaning Labour Party won the support of the minor nationalist New Zealand First party to form a ruling coalition.

It ended weeks of political guessing games but fanned concerns that the Labour Party’s hardline policies on immigrants and foreign ownership could hurt investor sentiment.

The New Zealand dollar NZD=D4 slid as much as 1.4 percent to $0.7047, which as well as the 4-1/2 month low was also the biggest percentage decline since November 2016.

CHINA FOCUS

Among the other headlines, China’s economic growth cooled slightly to 6.8 percent in the third quarter from a year earlier, from the second quarter’s 6.9 percent.

A modest loss of momentum had been expected as the government reins in the heated property market and cracks down on riskier lending.

Other data showed that China’s industrial output rose a stronger-than-expected 6.6 percent in September, while retail sales also outperformed. Property sales fell though for the first time in over two years.

“The GDP reading could weigh negatively on both mainland stocks and currency markets as traders may position for further weakness into year-end, suspecting financial curbs will continue to have a negative impact on growth in China,” said Stephen Innes, head of Asia-Pacific trading at OANDA in Singapore.

The dollar index against a basket of six major currencies was broadly steady at 93.340 .DXY.

The dollar was little changed at 112.940 yen JPY= after climbing 0.6 percent overnight. The euro nudged up 0.15 percent to $1.1802 EUR=.

The term of current Fed Chair Janet Yellen’s expires in February and investors are keen to see whom U.S. President Donald Trump will pick as her replacement. The White House said Trump would announce his decision in the “coming days”.

Brent had risen to a three-week high of $58.54 a barrel on Wednesday on worries about tensions in Iraq and Iran, but lost steam after a surprising drop in U.S. refining rates and an unexpected build in fuel stocks signaled slower demand in the world’s top oil consumer.

Reporting by Marc Jones; Editing by Gareth Jones

WELLINGTON (Reuters) – New Zealand’s next prime minister will be Jacinda Ardern, whose Labour party won the support of a small nationalist party to form the government, spelling big changes for a small but open economy, whose currency hit a 4-1/2-month low on the news.

Labour indicated it would pursue plans to change the central bank’s mandate, seek to renegotiate the Trans-Pacific Partnership trade deal and prioritize an effort to ban foreign ownership of certain types of housing.

“It is an absolute honor and a privilege to have the ability to form a government for all New Zealanders,” said Ardern, who will be the youngest prime minister in more than 150 years, ending the conservative National Party’s decade in power.

“These negotiations have been robust, but there has been more that has united the parties than has divided.”

The New Zealand dollar fell more than one percent on the news that Labour would lead a government with backing from New Zealand First, as markets worried it would usher in more protectionist policies.

Ardern, a political ingenue whose victory marks the emergence of another youthful global leader promising to shake up the status quo, said she had offered the position of her deputy to Winston Peters, the leader of New Zealand First, who was considering it.

“Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe,” Peters told a news conference.

ANKARA (Reuters) – Turkish President Tayyip Erdogan has called on mayors of three major cities to resign, including the high-profile mayor of the capital, Ankara, the Hurriyet newspaper reported on Thursday, in a push to revitalize his ruling party ahead of 2019 elections.

The comments mark Erdogan’s most explicit demand yet for a shake-up of veteran politicians – some of whom are nationally prominent – after voters in many cities rejected an April referendum granting him sweeping power.

“People do not take these offices as independent candidates but as candidates shown by parties. We cannot regard these posts as chairs which are kept eternally and never abandoned,” the Hurriyet quoted him as telling reporters on his plane back from a trip to Poland this week.

A request had been conveyed for the resignation of the mayor of Balikesir in northwest Turkey, the newspaper quoted him as saying.

“Likewise, this situation was conveyed to (Ankara Mayor) Melih (Gokcek). The same with Bursa,” he was quoted as saying. Bursa is a city in northwest Turkey.

The mayor of Istanbul has resigned in the last month, as has the mayor of Duzce city in northwest Turkey. The mayor of Nigde city in central Turkey, resigned on Wednesday.

DUBAI (Reuters) – Sheikh Mohammed bin Rashid Al Maktoum, Prime Minister and Vice-President of the United Arab Emirates and ruler of Dubai, said in a tweet a government reshuffle will be announced later on Thursday.

North Korea warns: Don’t join any US action and you’re safe

United Nations: North Korea warned countries at the United Nations on Monday in a statement: don’t join the United States in military action against the Asian state and you will be safe from retaliation.

The caution was contained in a copy of North Korean Deputy UN Ambassador Kim In Ryong’s prepared remarks for a discussion on nuclear weapons by a UN General Assembly committee.

Mattis: US military should be ready for North Korea

The US Army should be ready with military options on North Korea, says US Defense Secretary Jim Mattis, but he says efforts to deal with Pyongyang were being led diplomatically.

However, Kim did not read that section out loud.

“As long as one does not take part in the US military actions against the DPRK (North Korea), we have no intention to use or threaten to use nuclear weapons against any other country,” according to Kim’s prepared remarks.

“The entire US mainland is within our firing range and if the US dares to invade our sacred territory even an inch it will not escape our severe punishment in any part of the globe,” the statement read.

Tensions have soared between the United States and North Korea following a series of weapons tests by Pyongyang and a string of increasingly bellicose exchanges between US President Donald Trump and North Korean leader Kim Jong-un.

The UN Security Council has unanimously ratcheted up sanctions on North Korea over its nuclear and ballistic missile programs since 2006.